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The player drives a blue car around a multi-directional, scrolling maze. The car automatically moves in whichever direction the joystick is pushed, but if it runs into a wall, it will turn and continue. In every round, ten flags are scattered around the maze. The player must collect all of them to clear the round and move on to the next round. The flags increase in value as they are collected: the first is 100 points, the second is 200, the third is 300, and so on. There are also special flags (indicated by the letter "S") — if the player collects one of them, the value earned from flags doubles for the rest of the round. If the player dies, however, the next flag value is set back to 100 and the double bonus is lost. By collecting the special as the first flag with all 10 flags in one run, the maximum points the player can obtain from each round is 11000. The player will also obtain a fuel bonus after the round is complete, and it varies depending on how much fuel is remaining according to the fuel gauge.

Several red cars chase the blue one around the maze, and contact with any of them results in losing a life when hit. The number of these cars begins at three and increases in number throughout each normal round to eight. The first five appear at the bottom of the maze, and the next three will appear at the top of the maze. However, the player has a smoke screen, to use against the red cars. If a red car runs into a cloud of smokescreen, it will be momentarily stunned (but will still kill the player on contact). The amount of time stunned decreases with each level, but will still always cause the red car to chase the blue car using an alternate route. Using the smokescreen uses a small amount of fuel, and using it more than once every 30 seconds will almost ensure that it runs out before the round finishes.

The car has a limited amount of fuel which is consumed with time, though it is normally sufficient to last until all ten flags have been collected. When fuel runs out, the car moves very slowly and the smoke screen no longer works, so it very quickly falls victim to the red cars. If the player should clear any round without any fuel remaining (a rare occurrence), they will not receive a fuel bonus as a result.

There are also stationary rocks that the player must avoid. The rocks are randomly distributed throughout the maze, increasing in number as the game progresses. Unlike the cars and flags, their positions are not shown on the radar, so the player has to be careful for them. The rocks will also kill the player on contact, so the player has to be careful not to get trapped between rocks and the red cars. If this happens there is no escape.

On the third stage and every fourth stage after that, a bonus stage ("CHALLENGING STAGE") will start. The player must collect flags in the normal way, but the red cars (the maximum normal number of red cars, which is eight), are unable to move. If the player runs out of fuel, the red cars will start moving. If a player hits a red car or a rock, the challenging stage ends but the player will not lose a life. Once the player has run out of lives, the game will be over; if he or she had the highest score of the day, the game will tell them so.

In 1980, Battlezone, Defender, and Pac-Man were shown alongside Rally-X at a trade show sponsored by the Amusement Machine Operators of America. It was believed that Rally-X would be the top money-earner. Defender went on to sell more than 60,000 units — more than disproving these projections — and cemented its place in video game history.[2] Meanwhile, Pac-Man went on to sell more than 350,000 worldwide arcade units,[3][4] and it became the highest-grossing video game of all time.[5]

The game's sequel, New Rally-X (released in 1981), offers a slightly different color scheme and easier gameplay (the special flag now flashes on the radar, and there are fewer red cars). A new flag called the "Lucky Flag" was also added, which awards the player bonus points for the amount of fuel remaining when collected, after which the car is refueled, and the round continues if there are still flags remaining. New Rally-X was manufactured in greater numbers and became more popular (at least in Japan) than the original game.[citation needed]

The compilation arcade game Namco Classic Collection Vol. 2 (released in 1996), includes a version of the game with enhanced graphics and gameplay called Rally-X Arrangement (but it did not have multiplayer capability). Namco Museum Remix, which was released on October 23, 2007 for the Nintendo Wii, also features a revamped version of the game, known as Rally-X Remix, which was also included in Namco Museum Megamix.

Another revamped sequel, Rally-X Rumble, was released on Apple's iOS platform on August 17, 2011.